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19 October, 2020 - 15:21 By Tony Quested

Quoted company profit warnings surge as nuclear winter looms for listed firms

Stuart Wilkinson, EY

East of England listed businesses recorded an 86 per cent increase in profit warnings during the first three quarters of 2020 compared to the same period last year, according to EY’s stunning quarterly analysis. 

Year on year the number of profit warnings in the first nine months of 2020 from companies headquartered in the East of England increased from seven in the first three quarters of 2019 to 13 this time around. 

This increase mirrored the uptick in profit warnings across the country, although it was well below the top three regions, South East (137 per cent), Wales (133 per cent) and the West Midlands (119 per cent).

In 2020, over three quarters of profit warnings from East of England listed companies (77 per cent) have been attributed to COVID-19.

Stuart Wilkinson, office managing partner at EY in the East of England said: “It’s clearly been a difficult year for quoted companies based in the East of England. The ongoing COVID-19 pandemic, and general Brexit uncertainty, have led to record levels of profit warnings.

“It’s likely we can expect more as we move towards the end of 2020 and into 2021.”

After just nine months, the number of profit warnings issued by UK quoted companies has reached a new, annual high with more expected due to continued uncertainty from COVID-19, Brexit and the easing of government support.

The total number of profit warnings from UK businesses in 2020 at the end of Q3 was 524, setting a new record for the annual total. This figure replaces the 19-year-old record of 506 from 2001. However, the Q3 profit warnings total (58) was both below average for the quarter (64) and 25 per cent lower than Q3 2019, when there were 77. 

The top FTSE sectors warning in Q3 2020 were: Industrial Support Services (6), Investment Banking and Brokerage (5) and Construction and Materials (5).

The third quarter is typically the quietest period for corporate reporting and in 2020 this was amplified by the significant fall in earnings expectations earlier in 2020, the increase in activity as COVID-19 restrictions were relaxed and as government initiatives kicked in.

Wilkinson said: “The summer offered some respite for businesses to prepare for what is expected to be an exceptionally difficult Autumn and Winter. Many businesses have managed to navigate the day-to-day stresses of the current environment by adopting survival tactics. 

“However, with government support measures winding down and the reality of Brexit just around the corner, merely going back to basics isn’t enough.

“COVID-19 cannot be considered in isolation from other, broader market issues facing organisations. For example, the revolutionary, and persistent, impact of emerging technologies and changes to consumer behaviours and priorities.”

In the first three quarters of 2020 there were 449 profit warnings linked to COVID-19 with the sectors where social-distancing has reduced demand and capacity being most affected. 

However, Q3 2020 data indicates operating costs are now of increasing concern, with 24 per cent of profit warnings citing rising overheads – double last year.

Lisa Ashe, Turnaround and Restructuring Strategy Partner at EY, UK & Ireland, said: “Companies must recalibrate their businesses as a matter of urgency in order to secure their survival and potential to thrive in the future. It is vital they are able to adapt rapidly, and radically, to on-going change and uncertainty if they are to ensure long-term resilience.”

In the last 12 months, more than a third (36 per cent) of all UK quoted companies have materially lowered their profit forecasts at least once compared to 18 per cent in 2008 and 23 per cent in 2001. 

The 36 per cent figure offers insight into the extent of the impact of COVID-19 on the business community, particularly when you consider the numerous connections they hold within UK Plc.

Lisa added: “Supply chain resilience has never been more important. Market considerations posed by COVID-19 and Brexit have amplified the need to identify the weakest link in a supply chain and put additional support measures in place.

“Collaborative and innovative ways of working are emerging within various sectors to help stimulate business activity, while others are assessing opportunities to drive consolidation. Careful, strategic thinking across the ecosystem will prove vital.”

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